What Are Preference Shares?
Let me explain preference shares to you directly: they're shares of a company's stock that get dividends paid out before common stock dividends. If the company goes bankrupt, you as a preferred stockholder would be entitled to payment from company assets ahead of common stockholders.
Most preference shares come with a fixed dividend, unlike common stocks which generally don't. As a preferred shareholder, you typically won't have voting rights, but common shareholders usually do.
Key Takeaways
- Preference shares are company stock with dividends paid to shareholders before common stock dividends.
- There are four types of preferred stock: cumulative (guaranteed), non-cumulative, participating, and convertible.
- Preference shares suit risk-averse investors and are callable, meaning the issuer can redeem them at any time.
Understanding Preference Shares
You should know that preference shares fall into four categories: cumulative preferred stock, non-cumulative preferred stock, participating preferred stock, and convertible preferred stock.
With cumulative preferred stock, there's a provision requiring the company to pay you all dividends, including any omitted in the past, before common shareholders get theirs. These payments are guaranteed but not always timely; unpaid ones are called 'dividends in arrears' and go to the current owner when paid, sometimes with extra interest.
Here's the formula for quarterly dividend: [(Dividend Rate) x (Par Value)] ÷ 4. And cumulative dividends per share equal quarterly dividend times the number of missed payments.
Non-cumulative preferred stock doesn't cover omitted dividends. If the company skips dividends in a year, you as a shareholder have no claim to them later.
Participating preferred stock gives you dividends at the specified rate plus extra based on a condition, like if common shareholders' dividends exceed a set amount. In liquidation, you might get back the purchase price plus a pro-rata share of remaining proceeds.
Convertible preferred stock lets you convert shares into a set number of common shares after a certain date, usually at your request, though sometimes the company can force it. The value depends on common stock performance.
What Are Preference Shares?
Preference shares, or preferred shares, are securities blending features of common shares and fixed-income securities. As a holder, you get priority on dividends the company pays, but in return, you often miss out on voting rights or the upside potential of common shares.
What Are the Main Types of Preference Shares?
The four main types are cumulative preferred, non-cumulative preferred, participating preferred, and convertible. If you hold cumulative preferred, you're entitled to retroactive dividends for unpaid periods, making them pricier than non-cumulative ones which don't offer this. Participating preferred provide extra dividends if targets like profit levels are met. Convertible preferred let you convert to common shares at a specified price, similar to convertible bonds.
What Happens If You Own Preference Shares in a Company That Goes Bankrupt?
In bankruptcy, securityholders claim company assets based on their agreements. As a preference shareholder, you generally have priority over common shareholders, so you'd get paid before them, but you'd rank below corporate bonds, debentures, or other fixed-income securities.
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